Venezuela: Hide and Seek with Genscape's Flare-Signature Intelligence
Deciphering Venezuelan oil is akin to searching for a rusted penny at night in a muddy pond with only starlight to illuminate – you are better off relying on a metal detector. To provide transparency into the current situation, Genscape decided to deploy its proprietary flare signature methodology on Venezuelan oil production after having had success with Libya. As discussed below, we believe the work shines needed light in near-real time on Petróleos de Venezuela S.A's ("PDVSA") oil and other liquids production. Notably, Genscape's work disagrees with and sometimes front-runs benchmark data at key inflection points.
As with Libya, Genscape built the monitor using government, regulatory, and company data by field-area, and we mapped it to our proprietary flare signature methodology across time. The results are showcased in Figure 1 below along with a few key annotations.
As shown in Figure 1 above, the monitor markedly disagreed with the benchmark data five times since April 2013. Twice it is lower and thrice higher. During late 2013 through Q3 2015, the monitor did not detect signal degradation to corroborated production declines shown by the IEA and OPEC. By Q3 2015, the three time series (Genscape's Monitor, the IEA, and OPEC) converged as production estimates by the IEA and OPEC rose slightly and the monitor detected signal erosion. However, in Q4 2015 the monitor detected significant signal decay (followed by a brief recovery) and indicated that production was running into problems several months before the IEA and OPEC reflected a new period of sharp declines.
Subsequently, the monitor and the benchmarks moved in-line with each other until May 2017 when the monitor again detected significant signal declines. Part of these declines were the cessation of flare signatures from facilities in the El Salto and San Cristobal field-areas, which indicated production was again facing substantial headwinds. From that point through November 2017, the monitor showed production falling faster than the benchmarks.
However, after converging in November 2017, the monitor again diverged from the IEA, OPEC, and PDVSA during December, only to re-converge with PDVSA in January 2018.OEPC continues to show further declines in January while the IEA shows production flat with December 2017. Of note, PDVSA did comment after reporting December's production that January would be higher due to one-off factors in December 2017.Genscape's monitor confirms this short-term production increase.
Given the current period (December 2017 through the present) is likely the most important in Venezuela's history as it could portend an unstoppable decline to 1.0 mmbpd or lower (a devastating scenario for Venezuela), it is crucial to know when PDVSA or the IEA and OPEC are correct.
Genscape's High-Frequency Production Monitor Investigates
Since the monitor now agrees with PDVSA and not the IEA or OPEC for the first time in the monitor's history, Genscape wanted to investigate the possible errors or parts of Venezuela's oil system that may not be fully captured by our proprietary flare signature model.
First, we went through the field-areas in more detail, but still did not detect any abnormal fall-off in flare signatures during December 2017 or January 2018. While December's reported level of declines were certainly aberrant, we found no signals that indicated any field was suddenly having problems whose amplitudes exceeded their respective history.
Second, we evaluated the four Orinoco crude upgrader's operational signatures. While flaring (negative for upgraders) has certainly trended higher since 2013, general levels at year-end 2017 were not very different from Q1 2017, and were certainly lower than Q1 2016. These are two periods where production declines were smaller than those reported during December 2017.
Based on Figures 2 and 3 below, it appears that there were no abnormal upsets at upgraders during the end of 2017 going into this year. This month however, Genscape has seen a cluster of flaring that could indicate operational issues at both PetroPiar and PetroMonagas, This makes it seem less likely that upgrader operations dramatically affected crude production during the periods in question.
Third, we examined the largest refineries in Venezuela given their naphtha production is critical to transporting and blending heavy/extra-heavy Orinoco – less naphtha imperils Orinoco crude production. While it is unlikely that well-head volumes can continue for long without naphtha, we did not want to overlook the possibility that Orinoco crude was produced just long enough for us to detect heat signals, but then not ultimately transported and/or sold as final crude volumes, thus lowering the reported production number in December 2017.
As shown in Figures 4 and 5 below, Genscape detected a sharp degradation (increased flaring) in refinery operations at the end of 2016 and into 2017. It is well known that Venezuela's main refining complex, the Paraguana Refining Center (Amuay and Cardon), has serious operational issues, which have hobbled domestic refining capacity.
However, the level of flaring in December 2017 and January 2018 was roughly equal to or lower than previous periods of 2017 at Amuay and Cardon (other than a sharp flare burst for part of January when Amuay had operational issues). Genscape also knows that two smaller refineries, El Palito and Puerto La Cruz, are operating at significantly reduced levels, so the refinery situation is admittedly murky and heavily biased towards severe inconsistency. Therefore, it is possible that a shortage of domestic naphtha affected December and January Orinoco production volumes, but it is not clear cut that this is what would have caused volumes to crater so quickly. It seems likely that there was some impact, but it is odd that the disruptions would not have shown up in our field-area signals intelligence.
Fourth, we looked into whether Venezuela experienced a dearth of foreign-sourced diluent (light oil and naphtha), which would have affected transportation and blending of heavy/extra-heavy Orinoco crude similarly to a drop in domestically produced naphtha. Based on most available news reports, PDVSA's worst access to diluent imports occurred much earlier in 2017 and should not have affected December 2017 and January 2018. Therefore, it seems less likely that imported diluent issues dramatically affected crude production during the periods in question.
Fifth, we came across a variety of theories that indicated some level of mis-reporting by PDVSA. Some industry articles have contemplated that there is the possibility that PDVSA is underreporting production to lower the bar for Quevedo, the new head of PDVSA. We cannot fathom a guess as to this actuality.
Sixth, we returned to the obvious: Venezuela is not able to drill enough wells or maintain enough equipment to prevent declines from accelerating. However, the problem with such an explanation is that for production to decline between 8 and 12 percent from November 2017 to December (depending on which source is used) with no detectable field or upgrader issues is beyond strange. Given Venezuela's more than 13,000 producing wells, it is unlikely that they suddenly began declining at an astounding annualized rate of 65 to 77 percent in December 2017.
Given the uncertainty, Genscape wanted to provide more information to the marketplace and roll out the beta version of our new Venezuelan high-frequency oil production monitor, which has been available to our clients. While the monitor shows the production uptick in mid-January that PDVSA stated would occur, it does show that declines have resumed through February 11, 2018, albeit at a more normal implied rate.
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